Wednesday, January 14, 2009

A slide backwards

A recent post on ThinkMarkets asks if there has been any progress in macroeconomic policy. A commenter led me to an interesting post from Arnold Kling of the libertarian group Library of Economics and Liberty on just this subject.

Kling tears apart an article from Olivier Blanchard of MIT that argues macroeconomics is in good shape these days.

For those unaware, macroeconomics as a field hasn't really advanced much since the real business cycle model was introduced in the early 1980s. Improvements have been made, but as yet there is no inclusion of capital or financial markets as there isn't a good way to introduce money into the model. Thus, we find that, as Kling notes, "real-world data have interesting patterns that either are unexplained by or contradict the most widely-used models."

The bottom line is that macroeconomics is useless for understanding the financial crises, and this isn't going to change any time soon. This is too bad, as Kling notes:

Washington is currently discussing an economic stimulus package. This sounds like an issue on which macroeconomists ought to have an informed opinion. How large should it be? Should it be enacted at all? In all of the haikus [macro articles] that have been published over the past thirty years, is there one that offers a clue to the answer?

Macroeconomics can tell us nothing useful about the current policy environment. All we know for sure about what is taking place is that there has been a massive shift of power to Washington, with much more likely ahead.

A short bio

I am a consultant with the World Bank in DC and a recent PhD graduate of economics at the University of California, Irvine. My research is on conflict and post-conflict development, and the economic impact of the environment and environmental change. I am currently working on a randomized impact evaluation for the World Bank in the post-conflict area of northern Uganda.

My two favorite quotes

>> If you want to build a ship, don't drum up people to collect wood and don't assign them tasks and work, but rather teach them to long for the endless immensity of the sea. - Antoine de Saint-Exupery

>> One of Einstein's colleagues asked him for his telephone number one day. Einstein reached for a telephone directory and looked it up. "You don't remember your own number?" the man asked, startled.

"No," Einstein answered. "Why should I memorize something I can so easily get from a book?"